|
|
Sunday, June 1, 2003
 The
myth of the marriage penalty
A column published by MSN Money discloses that marriage creates more tax
and financial benefits than penalties. In reality, there is no
"marriage penalty" for most couples.
The column is written by financial advisor Liz Pulliam Weston. Here
is what she had to say.
If you
believed the rhetoric that accompanied the newest tax cut, you would
think that marriage was the most financially devastating event that
could happen to two people and that Congress was riding to the rescue by
“eliminating” the marriage penalty.
Not quite.
The reality is that even before the new tax act, more couples got a tax
bonus when they married than suffered a penalty.
Add to that all the legal and financial benefits of marriage, and the
state of wedded bliss for most people was far from economically
disadvantageous.
Life’s even better now the penalty has been mitigated -- at least
temporarily -- for most of those who were affected in the past.
Meanwhile, those in line for a bonus will see an even bigger one.
Hold on a minute
The problem with this happy state of affairs is that one of the most
egregious marriage penalties still exists, and the new tax act does
nothing to address it.
But more on that in a minute.
For now, let’s return to this idea that marriage was somehow a bad deal
financially before Congress acted.
To be sure, millions of people did pay for the privilege of saying “I
do.” Forty-two percent of married taxpayers paid more because they were
filing jointly than they would have if they remained single, according
to a 1996 Congressional Budget Office analysis. The average penalty was
a significant $1,380.
But more couples -- 51% of the total -- paid less tax jointly than if
had they not married. The average bonus these couples received: $1,300.
The people who got a tax break by marrying were those with disparate
incomes. The wider the gap between the paychecks of the husband and
wife, the bigger the bonus.
The people who tended to face a marriage penalty were those with similar
incomes. Typically, the more they made, the bigger the penalty they
paid.
But the people who faced the most egregious penalties, as a portion of
their income, were the working poor, according to tax expert Edward
McCaffery , a law professor at the University of Southern California and
the author of “Taxing Women.” A couple who each earn $10,000 could end
up with a marriage penalty of more than $4,000.
Good benefits add to wedded bliss
For most middle- and upper-income people, though, there are plenty of
financial benefits to marriage, regardless of their income tax
situation. Among them:
- Workplace health and pension benefits coverage.
While some companies offer health coverage
to domestic partners, this benefit is typically taxable as income.
When spouses are covered, the benefit is tax-free.
- Social Security retirement and survivor
benefits. A husband or wife is entitled to
one-half of the spouse’s Social Security benefits and to additional
benefits in the event of death.
- Lower insurance rates.
Married people usually get a discount on auto insurance
and may pay less for other types of insurance.
- Automatic inheritance rights.
Die without a will, and your spouse gets your stuff. In
many states, the surviving spouse has a legal right to at least
one-third to one-half of your estate.
- Preferential estate tax treatment.
The $1 million estate tax limitation doesn’t apply to
married people: you can leave an unlimited amount to a spouse without
owing one penny of estate tax. In certain states, this benefit is
multiplied by special capital-gains tax treatment for homes and other
assets held by married couples as community property.
These benefits will persist, even if Congress’
marriage-related tax changes don’t. (All the marriage-related changes
are scheduled to expire at the end of next year, although Congress will
face tremendous pressure to renew them.)
And at least for now, the income-tax penalty is history for the majority
of couples. The standard deduction for married couples is now twice that
for singles, and the 15% tax bracket has been widened for marrieds to
$56,800, twice the limit for singles.
Those who didn’t face a penalty, but got a bonus instead, will see that
bonus rise. The change in the standard deduction alone will save couples
$155, and the larger 10% and 15% bracket could add hundreds more.
There’s still a potential for an income tax marriage penalty once joint
incomes reach the 25% bracket, although married couples will still pay
less in taxes this year than last.
A penalty still on the books
The marriage penalty that remains has to do with Social Security taxes
and working spouses -- particularly women.
The Social Security Administration says 62% of the women over age 62 who
receive benefits do so based on their husbands’ work records, rather
than their own. A little more than half of these women didn’t earn
enough to qualify for payments based on their own work records. The rest
opted to take half of their husbands’ benefit because it was larger than
the check they could qualify for based on their own earnings.
Now, in one very real sense, these women are better off
married, since they benefit from their husbands’ larger Social Security
checks.
In another sense, they’re severely penalized, since all the Social
Security taxes they contributed over the years essentially yield no
additional benefit. They'd get the same payments if they'd never worked
and paid into Social Security.
This is no small potatoes. Social Security taxes now eat up 6.2% of the
every worker’s paycheck, up to an annual maximum of $5,394 on earnings
of $87,000, while employers contribute an equal amount.
As more women work, and earn better salaries, the proportion claiming
benefits based on a spouse’s record may decline somewhat. But because
men still earn more on average than women, this phenomenon certainly
won’t disappear. Given the precarious state of Social Security and
political realities, this is one marriage penalty that’s likely to
persist.
|
|
 Comments and Suggestions
|